In just over two years, the oil price has more than tripled, and hit a nine-year peak of $34 per barr...
According to Kermit Schoenholtz, analyst at SalomonSmithBarney, the surge in oil prices poses a significant inflationary threat but should not be over-estimated.
Schoenholtz notes that: "As a result of improved energy efficiency, the US now generates nearly 80% more real output per BTU (British Thermal Unit) than in 1970, prior to the first oil shock."
Schoenholtz also points to recent research which indicates that the impact of oil price shocks on prices in the US has declined substantially since 1980, "probably reflecting the Fed's more vigilant response to inflation over that period".
The impact of higher oil prices, of course, is not all bad. For those who export oil it means improvements in the balance of payment and fiscal accounts.
Ian Henderson, director of Fleming Investment Management and manager of its commodities funds, does not see the oil price as particularly inflationary. "We've already seen most of the increase reflected in the inflation figures. And, in any case, so much of the oil price is made out of government taxes that increases in crude prices get diluted."
When it comes to choosing stocks for his funds, Henderson sees tremendous value in oil exploration and production companies, but yet he is cautious. He says: "Given the price of a barrel of oil, oil-related stocks look extremely cheap. However, despite this huge undervaluation in the sector, I am not willing to take enormous bets on oil stocks because of investor sentiment." Oil stocks have looked cheap for quite some time but investors remain determined to ignore them. "It seems they are only interested in media, technology and telecommunation stocks."
Some say that the oil price rise is totally unsustainable and that Opec will soon increase production and drive prices down to around the $20 per barrell. Henderson agrees that Opec could quite easily increase production by 1.5 to 2 million barrels a day (from 25.2 million a day) and he sees the oil price in 12 months time at around $23 to $24.
His fund is 25% allocated to the oil sector, 33% to gold and other precious metals and 37% in other base metals.
Henderson manages the £29m Save & Prosper Commodity Share Fund which rose 36.9% in 1999 and, on 16 March, was down 2.8% for the year. He also manages the £10m JF World Commodity Open Trust which is distributed in Japan.
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